DigitalGlobe, Inc. [DGI] yesterday said it has agreed to acquire GeoEye, Inc. [GEOY], its primary United States-based competitor in the satellite earth imagery and geospatial analysis market, in a stock and cash deal valued at $900 million.
The merger agreement follows several months of bids and counter-bids by both companies to acquire the other, beginning with an undisclosed offer by GeoEye in February. The merger offers became public in May when GeoEye made another unsolicited, and ultimately unsuccessful, offer for DigitalGlobe valued at $792 million (Defense Daily, May 7 and May 8).
The deal must still be approved by the shareholders of both companies and regulatory authorities. Officials from both companies said on an analyst call that they don’t see any major hurdles to closure, which is expected either in the fourth quarter of 2012 or first quarter of 2013.
DigitalGlobe is offering GeoEye’s shareholders the choice of electing 1.137 shares of DigitalGlobe common stock and $4.10 per share in cash, 100 percent of the consideration in cash at $20.27 per share, or 100 percent of the consideration in stock, amounting to 1.425 shares of DigitalGlobe stock for each share of GeoEye stock they own. The offer represents a 34 percent premium to GeoEye’s $15.17 per share closing price last Friday.
At the close of the transaction, DigitalGlobe’s shareholders would own 64 percent of the combined operations and GeoEye shareholders the rest.
The deal would essentially leave one main U.S. competitor in the commercial satellite imagery space that uses its own satellites to provide services to the U.S. government, in particular the Defense Department. International competitors include the Astrium unit of the European Aeronautic Defence and Space Co.
DigitalGlobe said the merger makes sense on a number of levels, from strengthening shareholder value to offering its customers a stronger provider of imagery products and analysis.
The combined company “creates a global leader in earth imagery and geospatial analysis,” Jeffrey Tarr, president and CEO of DigitalGlobe, said in a statement. “Together we will create a more efficient, more diversified and more capable company, better positioned to thrive in a time of unprecedented pressure on our nation’s defense budget.”
DigitalGlobe said the deal would enable at least $1.5 billion in cost savings synergies coming from two main buckets in the years ahead. One would be a substantially lower capital expenditure footprint related to the construction and launch of the companies’ respective satellites, which currently cost a combined $400 million to $500 million annually spread over five satellites.
Going forward, DigitalGlobe expects to maintain a three-satellite constellation that will cost about $200 million annually. The companies each have a satellite under construction, one of which will be launched either in 2013 or 2014 and the other to be held as a spare—an industry first—until launch later this decade as a replacement for DigitalGlobe’s WorldView-1.
DigitalGlobe said that the reduced capital footprint will ultimately boost free cash flow.
There are no plans to replace DigitalGlobe’s Quickbird and GeoEye’s Ikonos and GeoEye-1 satellites when they reach end of life, DigitalGlobe said.
The other key savings component is operating savings, DigitalGlobe said. Additional details here will come before the close of the deal but the company’s bottom line is expected to begin benefitting in the second half of 2014.
As for both companies’ customers, DigitalGlobe said the merged company will still be able to meet the National Geospatial Agency’s requirements for the EnhancedView satellite imagery program that is a key revenue contributor to both companies. At the same time, the merger will result in a “substantial savings” to taxpayers, DigitalGlobe said, as well as “better integrated imagery collection, processing and analytics.”
Both companies have established raw image capture and basic image processing capabilities as well as delivery of products to customers while GeoEye brings established advanced imaging processing, analysis and map building to the mix, according to a briefing slide that was part of DigitalGlobe’s investor presentation.
DigitalGlobe said the larger initial constellation will be able to collect imagery faster and increase persistence while also providing more diverse sensors and simplified customer access to the industry’s largest image archive.
The company also said the combination will diversity its revenue base, which for DigitalGlobe is currently is about 63 percent U.S. government and 37 percent with other customers based on $387 million in projected annual sales. Combined with GeoEye, DigitalGlobe conservatively estimates pro forma sales of $600 million split evenly between the government and other commercial and international customers.
The $600 million in sales accounts for DoD’s proposal to reduce funding for EnhancedView in FY ’13, although Congress is considering adding some of this money back. The combined company will have more than $3 billion in contracted backlog.
Once the deal concludes, DigitalGlobe’s management will remain intact with Tarr continuing as president and CEO and Howell Estes as chairman. GeoEye President and CEO Matt O’Connell will advise management. DigitalGlobe will remain headquartered in Colorado and have a presence in Virginia and Missouri as well as offices elsewhere.
Morgan Stanley and Barclays are DigitalGlobe’s financial advisers on the deal while GeoEye is being advised by Goldman Sachs, Convergence Advisers and Stone Key Partners. Morgan Stanley and The Bank of Tokyo-Mitsubishi provided $1.2 billion in financing to DigitalGlobe to refinance its outstanding debt.
The private equity firm Cerberus Capital, which is GeoEye’s largest shareholder, will own between 11 and 13 percent of the combined company with an ownership cap of 19.9 percent. The firm will also have one of 10 board seats. Morgan Stanley will own about 10 percent of DigitalGlobe.